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Fonterra hikes milk price outlook, as farm cutbacks erode glut

News24 Sep 2015by Newsdesk

Fonterra raised hopes for dairy farmers, ditching a forecast of a further cut in farmgate milk prices, as it said that cutbacks prompted by low values had left New Zealand on track for one of its biggest output drops on record.

The Auckland-based dairy co-operative - which processes the vast majority of milk produced in New Zealand, the top exporting country – hiked by NZ$0.75 to NZ$4.60 per kilogramme of milk solids its forecast for the payout to producers in 2015-16.

The upgrade took the payout above the NZ$4.40 per kilogramme of milk solids paid last season, which ended in May, although remains below the NZ$5.70 per kilogramme of milk solids which industry group DairyNZ estimates as the average breakeven price for producers.

Indeed, the price revision reflected "signs that supply growth globally is easing", with milk output in New Zealand itself seen falling by "more than 5%" this season, compared with the 2% drop that Fonterra had previously expected.

Milk collections tumble

John Wilson, the Fonterra chairman, said that the co-operative's milk collections were so far this season running 5% below year ago levels - and slowing.

"We are currently tracking 8% down on last season on a weekly basis," he said.

"Farmers are responding to the tough economic conditions," reducing cow numbers and reducing feed supplements, with dryness also undermining production in some parts of the country.

The slowdown comes at a time when New Zealand output is approaching its seasonal peak, typically in October, amid the so-called "spring flush" encouraged by strong pasture condition.

Strong pace of decline

A reversal in New Zealand milk output this season would contrast with a 2% rise to 1,614m kilogrammes of milk solids in production in 2014-15.

And it would be an unusually strong pace of decline.

Data kept by the US Department of Agriculture, whose statistics set world benchmarks, shows that – on a calendar year basis - New Zealand milk output has not fallen by more than 5% since 1989, when it fell by 6.7%.

Not over yet

The Fonterra upgrade also follows a sharp recovery in dairy prices at its twice-monthly GlobalDairyTrade auctions.

Nonetheless, Fonterra remained cautious about the milk price recovery continuing.

Mr Wilson said that "a lift in [world dairy] demand, which is needed for prices to continue to rise, is still to come".

Theo Spierings, the Fonterra chief executive, said that the extent of "uncertainty", ranging from economic slowdown in China to Middle East unrest to sharp falls in oil prices, "means that world markets are likely to be difficult in the medium-term".

Low crude oil prices undermine dairy demand in cutting the purchasing power of oil exporting nations, many of which, such as Algeria and Russia, are large dairy importers.

Furthermore, milk output in other key producers is still rising, by 2.5% in the European Union in July, 1.2% in the US and by 5.4% in Australia, according to Rabobank.

The bank said it expected EU supply growth "to slow down in the coming months, but to remain positive".

Profits soar

The milk price revision came as Fonterra unveiled a jump in earnings top NZ$506m for the year to the end of July, from NZ$179m a year before, although stripping out "unusual" factors, the growth in profitability was less steep.

Normalised operating profits, at NZ$974m, was up 94% year on year.

Growth was achieved across the group, although proved particularly strong in consumer and foodservice operations in Asia, up fourfold to NZ$202m.

Fonterra has named China, Indonesia, Malaysia and Sri Lanka among eight "strategic markets" on which it is focussing growth hopes, with the other four comprising Australia, Brazil, Chile and New Zealand.